Interview: Abusing the US Court System to Collect Credit Card Debts

Debt buying-companies, a huge US industry, purchase delinquent debts—mostly credit card debts -- that lenders have given up on collecting. Each year these companies sue hundreds of thousands of people in an effort to collect the debt and turn a profit.

The hidden side of the story is the extent to which these companies rely on US courts as a collection tool—and the extent to which the courts are not standing up for the rights of the people being sued. The courts are failing to carefully scrutinize these lawsuits, which often lack basic evidence and are marred by widespread error, legal deficiency and other fundamental problems. There’s a big power imbalance between the people being sued – who are often poor and almost never have lawyers – and the big corporations that control the debt-purchasing business. Chris Albin-Lackey, a senior legal adviser at Human Rights Watch and author of the report, Rubber Stamp Justice, sat in on court hearings in Arizona, Maryland, Michigan, New York, and Philadelphia. He tells Paul Aufiero what he found.

Why are the courts letting themselves be used as a collection tool?

The attitude of many courts is that being a neutral referee means you sit back, ask parties to make arguments without interference or assistance, and you decide. But these defendants don’t know the law, don’t know their rights, and often they don’t even understand that the burden of proof is on the company that’s suing them, not on them. They don’t know how to argue the case, even when they have a good one.

Since many of the defendants in cases brought by these companies are poor and more than 99 percent do not have legal representation, the companies easily use the machinery of the court system to their own advantage.

Who are these companies?

While thousands of the companies involved are small, the industry is dominated by a few big players, most notably Encore Capital and Portfolio Recovery Associates. In recent years these two companies have each recovered $1 billion in debts annually. Encore claims that 1 in 5 US consumers owes them money or has owed them money in the past. As a group, debt buyers big and small file hundreds of thousands of lawsuits across the country every year. The way their business model boils down, if they can collect even 10 percent of these debts they can reap enormous profit.

What can happen is the judges tell people to go out and talk to the debt buyer’s attorney in the hallway or a back room. The attorneys for these companies can pressure a defendant into believing that they have no defense and that it would be in their best interest to drop their case and pay up – sometimes under the unethical pretense of giving impartial advice. Many people believe what these attorneys tell them.

Some courts have actually formalized these practices. For example, in Philadelphia’s municipal court, on a typical afternoon there might be about 100 people summoned for debt collection cases. A lot come thinking they’ll be in front of a judge and will have a hearing. But no judge is there – just the attorneys representing the debt buyers, who are running the courtroom.

The courts say they’re bringing these parties together to see if they can come to an amicable settlement, saving the court time and money. But you have sophisticated attorneys hectoring poor people who don’t know the law, convincing them to drop their cases. And the court doesn’t tell the defendants that you don’t have to enter into an agreement with the companies. In fact, on the day I observed these proceedings no court personnel said anything to the defendants at all about why they were there or whether they had to do what the debt buyer attorneys told them.

Don’t the companies have evidence to back these suits?

We know that many of the lawsuits are severely lacking in evidence. Debt buying companies have sued the wrong people, for the wrong amounts, and in many instances, do not have meaningful evidence to support their claims. The companies are the ones that calculate how much is owed and many courts do not even require them to show how they reached that calculation. It is not surprising that some of these companies have been hit with lawsuits by state attorney generals—but only after they have already won tens of thousands of dubious judgments in courts that didn’t ask the right questions.

These cases play out at the bottom of the court system, where underfunding and a large caseload mean that many judges are under pressure to try to move things along quickly. Debt buyer cases are among the biggest categories of cases on the civil court schedule, and these slow down progress on the overall caseload.

There’s a little bit of see no evil, hear no evil going on with these types of hearings. Some judges are willing to turn a blind eye to some fairly unpleasant realities to clear their dockets. Others just don’t understand that this is a real issue—that these are cases they should worry about and scrutinize.

But these people owe money. Why shouldn’t someone collect?

We’re not arguing that debt buyers don’t have legal rights to pursue their claims. But the courts need to stop the cases where there is insufficient evidence, errors, and even abuse. Right now, too many courts simply don’t know whether the judgments they are handing down in favor of these companies really have merit. Also, the people being sued often don’t know enough to mount a case in their defense—and they have no way of getting decent legal advice. Given the fact that the economic impact of losing these cases can be devastating for a struggling family, the courts should step in.

Can you give us an example of someone caught up in this situation?

I met a woman in court in Detroit who had a default judgment (issued by courts when defendants don’t fight a case—sometimes because they never receive proper notice of it) issued against her. When I met her, she was crying. She has two little kids, her lights had been shut off, and she was having trouble buying food and diapers. She claimed she never knew she’d been sued, let alone had a judgment against her. She had been unemployed, and had just gotten a job working for $10 an hour at a Dollar General store. A few weeks into the job the debt buyer who had the judgment against her figured out that she had started earning money and began garnishing 25 percent off every paycheck. She said she only found out about the judgment because her paycheck was getting docked.

She was in court to have the judgment thrown out. The first thing the judge said to her was that she should go out in the hall and talk to the attorney for the debt buyer. She did, and the attorney told her she had no case, that the judge would never go for the argument she wanted to make, that her best option was to go on a payment plan. She was clearly convinced this guy was giving her good legal advice, but in reality he was squeezing her. She didn’t understand that he wasn’t there to help her; he was there to defeat her.

She told the judge she’d drop her objection. But she walked out of court still feeling she had no idea if she actually owed the money, still feeling that she had been given no proper notice about being sued in the first place and therefore no opportunity to defend herself, and still wondering about how she would pay her bills. She never had a meaningful day in court—she never got to explain her side of the story to a judge at all. She didn’t know she had a right to say, “No judge, I don’t want to go out in the hallway and talk to that guy.”

When you think of how many cases these companies bring each year, these tactics become really distressing.

The overwhelming majority of these cases end in “default judgments.” This is when people don’t do anything to defend against the lawsuit so they lose automatically. They don’t come to court, they don’t fight back, they just lose. Sometimes people just don’t want to deal with it. In some cases, they can’t hire a lawyer and have no idea how to respond to a lawsuit so they just don’t. And in some cases they don’t even know about the lawsuit – they hadn’t been properly notified.

These companies sue hundreds of thousands of people each year and win the overwhelming majority of those cases by default, without ever having to argue in front of a judge. Combine this with the known patterns of errors, and you have this situation where courts are just in some cases rubber stamping cases, filed by huge corporations against vulnerable people, without knowing if the claims have merit.

How can this be fixed?

The change that’s needed isn’t radical reform or even expensive.

Courts should demand to see enough evidence from the plaintiff to feel confident that cases have merit before issuing a default judgment, to see that they’re suing the correct people for the correct amount.

We also think courts should do more to make sure the people being sued know about the lawsuit—that they have really been served. And while not all people being sued will have a lawyer, experience shows you can get good results by making sure they at least have access to independent legal advice. Courts could facilitate efforts by legal aid or pro-bono attorneys to advise people on what they should do before doing into courtroom.

New York’s court system has just implemented rules that address some of these concerns. They went into effect last year, and we don’t yet know how successful they will be. But we think this is the kind of approach other states should be taking, along with other needed reforms.